The eurozone crisis has not gone away, just been temporarily muted by a more assertive ECB and a sullen acquiescence by eurozone voters that debt-fuelled growth is unsustainable. But acquiescence is not a cure.
Across the eurozone unemployment, in particular among the younger cohorts, is on the rise. There is a realisation that in some countries (Greece, Cyprus) debt is unpayable; in other countries (Ireland, Italy) it may become so. Eurozone banks remain fragile.
My reading every possible solution leads to German taxpayers picking up the tab. German politicians have for the last 18 months asserted that nothing can be done in terms of implementing lasting solutions until after the German elections. These now loom so the time is coming when either Germany accepts its role as the economic leader and with it the costs, or it continues its policies of ‘I’m all right Jack’ . Either lead to costly outcomes, and it appears none are being discussed by the contenders for Angela Merkel’s job.
Break-up of the euro has receded as a possibility but that is merely due to the fact that it has already in part happened. We have two parallel euros — one that is stuck within Cyprus and one outside. Cyprus operates capital controls. This is the first step to withdrawal from a currency. The problem from the perspective of Europe as a whole is that a Cypriot withdrawal from the currency acts as a demonstration effect. It shows what is possible. In a break-up we end up, I think, not with two currency blocks of a weak and strong euro but with a central core of Germany plus perhaps Austria and Finland and a plethora of weaker currencies all seeking competitive devaluations along with a damaged international banking system. Germany will find itself slowly drifting back into the problems that a high currency generates. Let’s not forget that in the early years of the last decade it was being seen as the sick man of Europe.
To retain the euro in the long-term as a viable currency requires at the barest minimum a functioning banking union, which requires as a prerequisite that there be a functioning regulator and that there be agreed loss sharing and wind down protocols. At present this is not in sight; Germany has rejected a number of proposals that would have enabled this.
Germany is seeking to have special status granted to its politicised Landesbanks, ideally to exclude these from the banking union. Germany has granted ‘too big to fail’ status to all its banks, and the consequence is that they enjoy a competitive advantage over all other states’ banks. This translates into a lower cost of capital for German borrowers. A properly functioning banking union will cover all banks, and so a cost is there to be borne when a banking union emerges.
Alternative approaches to dealing with debt also result in a cost to the German taxpayer. Mutualisation of debt or eurobonds will result in the cost of borrowing for high-yield countries (such as Ireland or Italy) falling while it rises for the core. There would be massive conditionality. We have already seen that the Bundestag gets to run its eyes over the Irish budget before the Dáil. This would become the norm. German taxpayers would have it no other way, quite understandably. But there would be a cost. Debt write-offs would be similar.
The final approach to dealing with unpayable debts is to inflate their nominal value away. For cultural and historical reasons inflation is anathema to Germans. And yet, outside Germany, this is probably seen as the most feasible and economically least dislocative way of dealing with debts.
So, Germany ends up picking up a tab sooner or later. It’s not politics, it’s the inevitable outworking of the economics of the union. Everyone else has paid, Germany is not immune.
© Irish Examiner Ltd. All rights reserved